Deputy Commissioner of Taxation v Commercial & General Law (SA) Pty Ltd [2011] FCA 1269 (7 November 2011)

Last Updated: 8 November 2011

FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Commercial & General Law (SA) Pty Ltd [2011] FCA 1269

Citation:		Deputy Commissioner of Taxation v Commercial & General Law (SA) Pty Ltd [2011] FCA 1269
Parties:		DEPUTY COMMISSIONER OF TAXATION v COMMERCIAL & GENERAL LAW (SA) PTY LTD ACN 126 471 547
File number:		SAD 154 of 2011
Judge:		LANDER J
Date of judgment:		7 November 2011
Catchwords:		COURTS AND JUDICIAL SYSTEM – delegation of powers to Registrar – application to review “exercise of power” by Registrar – winding up application – preliminary issue decided by Registrar – factual finding regarding the compounding of a debt – whether application for review competent – whether conclusions of Registrar correct – application dismissed as incompetent BIAS – whether reasonable apprehension of bias – recusal application refused.
Legislation:		Acts Interpretation Act 1901 (Cth) s 29 Corporations Act 2001 (Cth) s 459C, s 459E, s 459G, s 459P, s 459Q, s 459R Evidence Act 1995 (Cth) s 160 Federal Court of Australia Act 1976 (Cth) s 35A, s 35A(1), s 35A(1)(h), s 35A(5), s 35A(6), s 35A(7) Federal Court (Corporations) Rules 2000 r 16.1, r 16.2
Cases cited:		British American Tobacco Australia Services Pty Ltd v Laurie [2011] HCA 2; (2011) 242 CLR 283 cited Commonwealth Bank of Australia v Parform Pty Ltd [1995] FCA 1445; (1995) 13 ACLC 1309 considered Ebner v Official Trustee in Bankruptcy [2000] HCA 63; (2000) 205 CLR 337 cited Harris v Caladine [1991] HCA 9; (1991) 172 CLR 84 cited Johnson v Johnson [2000] HCA 48; (2000) 201 CLR 488 cited Livesey v New South Wales Bar Association [1983] HCA 17; (1983) 151 CLR 288 considered Smart Company Pty Ltd (In Liquidation) v Clipsal Australia Pty Ltd (No 6) [2011] FCA 419 cited The Commissioner of Taxation of the Commonwealth of Australia v Lutovi Investments Pty Ltd [1978] HCA 55; (1978) 140 CLR 434 considered Trustees of the Franciscan Missionaries of Mary v Weir [2000] FCA 574; (2000) 98 FCR 447 cited
Date of hearing:	28 October 2011
Place:	Adelaide
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	131
Counsel for the Plaintiff:	Mr P Britten-Jones
Solicitor for the Plaintiff:	Hunt & Hunt
Counsel for the Defendant:	Mr S McNamara
Solicitor for the Defendant:	Commercial & General Law (SA) Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	SAD 154 of 2011

BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Plaintiff
AND:	COMMERCIAL & GENERAL LAW (SA) PTY LTD ACN 126 471 547 Defendant

JUDGE:	LANDER J
DATE OF ORDER:	7 NOVEMBER 2011
WHERE MADE:	ADELAIDE

THE COURT ORDERS THAT:

1. The application be dismissed as incompetent.
2. Commercial & General Law (SA) Pty Ltd pay the Deputy Commissioner of Taxation’s costs of the application for review.
   

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	SAD 154 of 2011

BETWEEN:	DEPUTY COMMISSIONER OF TAXATION Plaintiff
AND:	COMMERCIAL & GENERAL LAW (SA) PTY LTD ACN 126 471 547 Defendant

JUDGE:	LANDER J
DATE:	7 NOVEMBER 2011
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

1. This is an application by Commercial & General Law (SA) Pty Ltd (Commercial & General Law) purportedly made under s 35A of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) and r 16.1 of the Federal Court (Corporations) Rules 2000 (Corporations Rules) to review the “exercise of power” of a Registrar of this Court.
2. At a directions hearing prior to the hearing of this application Mr McNamara, solicitor for Commercial & General Law and one of its directors, asked me to disqualify myself from hearing the application on the ground that I had recently made adverse findings against him, Commercial & General Law, and clients of Commercial & General Law, and that in those circumstances a fair-minded lay observer might think that I might not bring an impartial mind to this application. I refused that application and heard the substantive application.
3. These reasons address the application for me to disqualify myself. They also address the competency and merits of the application for review.
4. I have concluded that the application for review is incompetent. However, if I am wrong about that the application should be dismissed on its merits.

Procedural History

5. On 24 June 2011 the Deputy Commissioner of Taxation (the Deputy Commissioner) applied under s 459P of the Corporations Act 2001 (Cth) (Corporations Act) for the winding up of Commercial & General Law on the ground of insolvency. The Deputy Commissioner also sought orders for the appointment of a liquidator and the costs of the application.
6. The application relied upon a failure by Commercial & General Law to comply with the statutory demand: s 459Q.
7. In accordance with that last section the originating application had attached to it a statutory demand issued by the Deputy Commissioner to Commercial & General in the amount of $184,091.51, which had been served upon Commercial & General Law by posting it to Commercial & General Law’s registered office on 8 March 2011. The originating application was also accompanied, in accordance with s 459Q, by an affidavit deposing that the amount claimed in the statutory demand was due and payable.
8. A statutory demand must comply with the provisions of s 459E(2) and, in particular, it must be in the prescribed form, specify the total of the amount of the debt, and require the company to pay the amount of the debt or to secure or compound for that amount to the creditor’s reasonable satisfaction within 21 days after the demand is served on the company: s 459E(2)(b), (c) and (e).
9. A company which is served with a statutory demand must either comply with it or apply for an order setting it aside within 21 days after the demand is served: s 459G. Such an application, if it is made, has the effect of extending the time within which the company has to comply with the statutory demand.
10. In this case no such application was made.
11. An application for a company to be wound up in insolvency must be determined within six months after the application is made: s 459R. On such an application the Court must presume that the company is insolvent if during or after the three months ending on the day when the application was made the company failed to comply with the statutory demand: s 459C(2)(a).
12. On 2 August 2011 a notice of appearance was filed in the following terms:

Notice is given that Stephen Patrick McNamara of Commercial & General Law solicitor for Commercial & General Law (SA) Pty Ltd (ACN 126 471 547) the defendant intends to appear before the Court at the hearing of the application to be heard at Level 5, Roma Mitchell Commonwealth Law Courts, 3 Angas Street, Adelaide 5000, to oppose the application.

13. The grounds of opposition to the winding up were stated in the notice of appearance:

1. The defendant is solvent.

2. The defendant has secured or compounded the debt to the plaintiff’s reasonable satisfaction.
   
3. The defendant contests the debt on the basis that it is not due and owing in that the plaintiff and the defendant reached an agreement as to the payment of the debt subsequent to the service of the creditor’s statutory demand for payment of the debt.
   
4. In the alternative the debt set out in the creditor’s petition is not due and payable by the defendant to the creditor, the amount having been reduced subsequent to the service of the creditor’s statutory demand for payment of the debt.
   

It is not in the public interest to wind up the defendant.

14. On the same day a notice of address for service was filed with the address for service being Commercial & General Law’s own address.
15. I think the effect of the notice of appearance and the notice of address for service is that Commercial & General Law is acting for itself.
16. The Deputy Commissioner’s application was subsequently supported by Gregory Stephens, a barrister who claimed to be owed the sum of $51,364.50 in relation to tax invoices which had been provided by him to Commercial & General Law between 2 April 2010 and 20 February 2011.
17. On the same day as the notices were filed, Commercial & General Law filed an affidavit of Terry Smith, an accountant who is the Principal of HM Solutions, a consulting accountant for businesses and individuals that has carried out Commercial & General Law’s accounting work since the company’s incorporation on 10 July 2007.
18. A further affidavit sworn by Mr Smith was filed on 23 August 2011. In that second affidavit Mr Smith addressed Commercial & General Law’s financial position and offered the opinion that Commercial & General Law was solvent.
19. On 24 August 2011 Nick Nicolaou, who was an accountant in the accounting firm Luestner & Associates (who are accountants to Mr McNamara), deposed that he had read Mr Smith’s affidavits, and said that he had adjusted the accounts of Commercial & General Law and that as a result the amount payable by Commercial & General Law to the Deputy Commissioner was less than $95,000. He also offered the opinion that Commercial & General Law was solvent.
20. Also on 24 August Commercial & General Law filed an affidavit of a director of a company that is represented by Commercial & General Law in which the director deposed that Commercial & General Law was acting for the company and that the company would pay Commercial & General Law the sum of $100,000 from the sale of opal stones on or before 30 September 2011. The director said it would be severely prejudicial to his company’s business if Commercial & General Law was wound up, and that it was not in the public interest for Commercial & General Law to be wound up.
21. On 2 September 2011 the Deputy Commissioner filed an affidavit of Aaron Tracey deposing to Commercial & General Law’s indebtedness to the Deputy Commissioner as at 1 September 2011, which was in the sum of $134,263.92. Mr Tracey also exhibited a facsimile which had been received by the Deputy Commissioner on 31 March 2011, and an extract of the case notes which recorded conversations had by officers of the Deputy Commissioner with Mr Smith to which I will refer later.
22. On 3 August 2011 the Registrar made orders for the filing of affidavits, and the application for winding up was listed for hearing on 15 September 2011. At a further directions hearing on 2 September 2011 further orders were made regarding the filing of affidavit material. The hearing date was confirmed.
23. On 15 September 2011 Mr McNamara, who appeared for Commercial & General Law, requested that the Court allow him to call evidence from Mr Smith and hear a preliminary issue as to whether within the relevant 21 day period after service of the statutory demand Commercial & General Law had compounded for the amount of the debt to the plaintiff’s reasonable satisfaction. He claimed that the outcome of that question would impact on the further conduct of the hearing. Because the Deputy Commissioner did not oppose the application proceeding in that way, the Registrar acceded to the application.
24. On 29 September 2011 the Registrar published reasons for concluding that as a matter of fact there had not been any agreement, arrangement or understanding reached between the parties during the relevant period that would have amounted to a composition by the Deputy Commissioner of the debt owed by Commercial & General Law. She also concluded, as a matter of fact, that any proposed arrangement was not objectively to the Deputy Commissioner’s reasonable satisfaction.
25. She concluded her reasons at [39]:

[39] I am therefore of the view that the Defendant did not within the relevant 21 day period compound for the amount of the debt to the Plaintiff’s reasonable satisfaction.

26. She did not make any order or any other direction, except at the time of handing down her reasons when she indicated the date on which the matter would be heard.
27. On 19 October 2011 (being the last day available) Commercial & General Law filed an application seeking a review of the exercise of power identified in the application for review. The notice described that exercise of power as follows:

DETAILS OF EXERCISE OF POWER SOUGHT TO BE REVIEWED

The Applicant seeks to review the orders made by Registrar Christie at Adelaide on 29 September 2011.

Terms of the Order and/or Finding:

1. A finding that the Defendant did not within the relevant 21 day period compound for the amount of the debt to the Plaintiff’s reasonable satisfaction.
   

DETAILS OF ORDERS SOUGHT TO BE REVIEWED

The Applicant seeks to review all of the Orders and/or Findings made by Registrar Christie on 29 September 2011.

28. The orders sought in the application were:

1. That this Review be allowed.

2. That all of the Orders and/or Findings made by Registrar Christie on 29 September 2011 be set aside.
   
3. That the Defendant did within the relevant 21 day period compound for the amount of the debt to the Plaintiff’s reasonable satisfaction.
   
4. That the application of the Respondent filed on 24 June 2011 to wind up the Defendant be dismissed.
   
5. Costs.
   
29. As I have already said, the Registrar did not make any orders on 29 September 2011 other than some directions regarding the filing of affidavit material for the winding up hearing. However, she did make the finding of fact said to be the exercise of power sought to be reviewed in the application.
30. The orders sought on the application for a review include an order that this Court on review make a factual finding that Commercial & General Law did within the relevant period compound for the amount of the debt to the Deputy Commissioner’s reasonable satisfaction.
31. Such a finding, of course, is not an order, so the order sought in paragraph 3 could not be made as an order.
32. The matter was listed before me on 21 October 2011 when Commercial & General Law made an application for me to disqualify myself.

The Recusal Application

33. Prior to the hearing on 21 October Commercial & General Law had written to the Registrar in the following terms:

I refer to the above Application that was filed yesterday. We have been advised that the matter will be heard by the Honourable Justice Lander. We respectfully submit that Justice Lander should disqualify himself from hearing this matter because of adverse findings His Honour has recently made against:

1. The writer, being a director and 50% shareholder of the Applicant,

2. The Applicant, and

3. Clients of the Applicant.

The adverse findings were made in the judgement delivered by His Honour in Smart Company Pty Ltd (In Liquidation) v Clipsal Australia Pty Ltd (No 6) [2011] FCA 419 on the 29th [of] April 2011.

34. Commercial & General Law’s application for me to recuse myself had to be considered in the following circumstances. Mr McNamara, who appeared for Commercial & General Law, is apparently a director and 50% shareholder in Commercial & General Law, and I have assumed also an employee of that company. Commercial & General Law holds a practising certificate and is therefore entitled to practise as a legal practitioner.
35. Commercial & General Law represented the applicant in a proceeding which I heard and which I dismissed on 29 April 2011: Smart Company Pty Ltd (In Liquidation) v Clipsal Australia Pty Ltd (No 6) [2011] FCA 419.
36. In that proceeding I was critical of the way in which the applicant conducted itself in the proceeding, and I rejected submissions made by Mr McNamara, who appeared for the applicant through his engagement with Commercial & General Law at a number of hearings.
37. In criticising the applicant in that proceeding I also said in my reasons that I disagreed with some assertions Mr McNamara had made as to what he thought was the effect of orders I had made.
38. I found that the applicant had failed to prosecute the proceeding diligently and had failed to comply with a number of orders that I had made, and I dismissed the proceeding.
39. Mr McNamara claimed that, as a result of my findings and my criticisms, a lay observer might reasonably apprehend that I might not bring an impartial mind to the resolution of this application. I reject that submission, which I think is simply not maintainable.
40. At no time was I ever critical of Commercial & General Law. Indeed I said nothing about that law firm at all. I did say that I thought some of Mr McNamara’s claimed understandings were not reasonable, but I said no more than that.
41. I dismissed that proceeding because the evidence overwhelmingly showed that the applicant had failed to prosecute the proceeding diligently, and had failed to comply with a number of orders over a period of some years.
42. It was a necessary part of that inquiry to determine whether the applicant had acted reasonably, and I concluded that it had not. It was also necessary to deal with a number of submissions put by Mr McNamara and later senior counsel in relation to the applicant’s corporate state of mind with respect to orders that I had made.
43. It cannot be said that a fair-minded lay observer might reasonably think that I might not bring an impartial mind to this inquiry: Ebner v Official Trustee in Bankruptcy [2000] HCA 63; (2000) 205 CLR 337 at [8] per Gleeson CJ, McHugh, Gummow and Hayne JJ; Johnson v Johnson [2000] HCA 48; (2000) 201 CLR 488 at [12] per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ; Livesey v New South Wales Bar Association [1983] HCA 17; (1983) 151 CLR 288; British American Tobacco Australia Services Pty Ltd v Laurie [2011] HCA 2; (2011) 242 CLR 283 at [104] per Heydon, Kiefel and Bell JJ. This is especially so in circumstances where there is no dispute between the parties in relation to the facts upon which the Registrar relied for her conclusion. There is no issue relating to the credibility of any witnesses. Nor is there any issue relating to Mr McNamara’s credibility: compare Livesey v New South Wales Bar Association at 300; British American Tobacco Australia Services Pty Ltd v Laurie at [139]-[140] per Heydon, Kiefel and Bell JJ. The only witness who gave viva voce evidence was Mr Smith, and that evidence is to be considered in the light of documents which were created contemporaneously with what was claimed to be the date of the composition of the debt.
44. In Livesey v New South Wales Bar Association the High Court said at 294:

...it would be an abdication of judicial function and an encouragement of procedural abuse for a judge to adopt the approach that he should automatically disqualify himself whenever he was requested by one party so to do on the grounds of a possible appearance of pre-judgment or bias, regardless of whether the other party desired that the matter be dealt with by him as the judge to whom the hearing of the case had been entrusted by the ordinary procedures and practice of the particular court.

45. For these reasons, I refused to recuse myself.

Competency of the Application

46. After I had notified the parties that I would not recuse myself I had my Associate write to the parties asking them to address in writing the question whether this application is competent. In particular, the question that I asked to be addressed was whether the Registrar had exercised a power that would enliven the right of a party to the proceeding to review the exercise of that power. The parties responded.
47. For the reasons that follow, I do not think that this application is competent because it does not seek the review of an exercise of power. Rather, it seeks the review of a finding of fact which is antecedent to the exercise of power, and, more importantly, a finding of fact that is not determinative of the exercise of power.

Facts

48. However, before explaining my reasons for reaching that conclusion I should identify the facts which are not in dispute that gave rise to the Registrar’s findings of fact. For that purpose I rely on the evidence that was before the Court on this issue, being the affidavit of Mr Smith filed on 2 August 2011, the affidavit of Mr Tracey filed on 2 September 2011, and the oral evidence given by Mr Smith. The parties did not seek to adduce any additional evidence on the application.
49. Mr Smith has been Commercial & General Law’s accounting officer since the company’s incorporation, and before that time Mr McNamara’s accounting adviser since 2006.
50. He regularly visits Commercial & General Law’s premises from which the company operates for the purpose of carrying out his duties. Mr Smith prepares on behalf of Commercial & General Law the necessary taxation returns, including BAS returns, for submission to the Deputy Commissioner.
51. Because of Commercial & General Law’s client base, which includes clients in dispute with the Deputy Commissioner, Commercial & General Law resolved to have Mr Smith conduct any discussions that were necessary with the Deputy Commissioner in relation to Commercial & General Law’s obligations for payment of taxation.
52. He said in his affidavit that on or about 9 September 2010 he entered into an arrangement with the Deputy Commissioner for the payment of outstanding tax. The uncontroverted evidence exhibited to Mr Tracey’s affidavit is that on 3 September 2010 Mr Smith contacted the Australian Taxation Office (ATO) in response to a director penalty notice which had been received that day. He advised that he would speak to his client and get back to the ATO.
53. On 7 September 2010 he telephoned the ATO and advised that Commercial & General Law had been successful in a proceeding and expected to receive $300,000 in “a couple of months”.
54. The next day, on 8 September 2010, Mr Smith sent to the ATO by facsimile a letter in which he stated that Commercial & General Law expected to receive a large payout of approximately $500,000 in the next 12 weeks. He asked whether the ATO would agree to enter into an agreement by which Commercial & General Law would make payments over a period of 24 months.
55. On 10 September 2010 Mr Smith sent a letter by facsimile requesting a payment arrangement over 24 months together with a remission of GIC. On the same day the ATO agreed to a payment arrangement consisting of 11 monthly payments of $6,000 commencing on 1 October 2010 followed by a lump sum of $30,000 in the twelfth month, and then payments of $8,000 up to 1 August 2012 with a final payment on 1 September 2012 of $4,787.55.
56. On 1 October 2010 Commercial & General Law paid the sum of $6,000, but made no further payments in accordance with the agreement at any time before 31 March 2011.
57. Mr Smith said in his affidavit:
    26. The Defendant made payments to the Plaintiff pursuant to the September 2010 Agreement.
        
58. That statement is not quite accurate. Only one payment was ever made.
59. On 17 November 2010 the ATO attempted to contact Mr Smith by telephone but was unsuccessful. A further attempt was made on 2 December 2010 but this was also unsuccessful.
60. As a result, on that day the ATO sent to Commercial & General Law a Notice of Intended Legal Action. The reasons for the issue of the Notice were stated by the ATO as follows:

Attempts to contact the tax payer via phone calls have been unsuccessful.
The debt has been escalating since 2008.
There have been three defaulted payment arrangements since 2009.

61. Mr Smith responded to that notice on 6 December 2010 by telephoning the ATO. He was advised that Commercial & General Law had until 22 December 2010 to pay the debt in full or enter into a payment arrangement.
62. The debt was not paid, nor was a payment arrangement entered into prior to 22 December 2010.
63. On 4 January 2011 Mr Smith telephoned the ATO and told the ATO that Commercial & General Law was awaiting the outcome of a court hearing on 19 January 2011 when it expected to receive substantial fees. However, Commercial & General Law was waiting on the outcome of the hearing to determine when payment could be made.
64. It was agreed that Mr Smith was to call back on 20 January 2011 to advise of the result. He did not.
65. As a consequence, on 25 January 2011 the Deputy Commissioner resolved to issue a garnishee application directed to the National Australia Bank for the debt. The garnishee application was made and Commercial & General Law was advised of the making of the application on 25 January 2011.
66. Later that day Mr Smith telephoned the ATO and advised that the outcome of the court hearing had been adjourned to 1 March 2011, but that roughly $500,000 would be available after the hearing was completed.
67. On 28 January 2011 the ATO was advised that the garnishee had been unsuccessful.
68. No further payments were made by Commercial & General Law, and on 21 February 2011 the ATO sent a Notice of Intended Legal Action for the outstanding debt of $183,184.54. Neither Mr Smith nor Commercial & General Law responded to that Notice, and on 8 March 2011 the ATO issued the statutory demand for the amount of $184,091.51.
69. The parties proceeded on the basis that service of the statutory demand occurred on 10 March 2011 (or two days after it was posted), and that accordingly 31 March was the last day on which Commercial & General Law could compound for the debt to the Deputy Commissioner. This might not be right because of s 29 of the Acts Interpretation Act 1901 (Cth) and s 160 of the Evidence Act 1995 (Cth). However, this issue does not need to be decided because the communications that are alleged to have given rise to the agreement, arrangement or understanding on any of the relevant statutory provisions occurred within the 21 day period after service of the statutory demand.
70. Nothing was heard from Mr Smith or Commercial & General Law until 25 March 2011 when Mr Smith telephoned the ATO requesting an extension of time for his client to comply with the statutory demand. At that time he was advised that an extension could not be granted and he was asked to send a written proposal on how Commercial & General Law intended to address the debt. The ATO record reads:

Advised Terry we cannot grant an extension, and asked him to send us a written proposal on how they will address the debt. I did not ask for financial statements when during our conversation, it was indicated that the debt will be paid in full upon the client’s receipt of the expected legal services fees.

71. On 31 March 2011 at 3.00pm Mr Smith sent to the ATO a facsimile dated 30 March 2011. It reads:

Further to my discussion with Dimi on 26 Mar 2011, I am supplying additional information regarding forthcoming payments of the Integrated Account.

The directors are very aware of their obligation to satisfy their commitments to pay the firms [sic] outstanding debt to the ATO. As a small law firm they have had an unfortunate client mix over recent years, which has culminated in a relatively small number of clients building up large debtor balances to the firm. These generally have been protracted actions, from which the firm receives the majority of its fees only once they have concluded.

There are two clients very close to receiving compensation payments which include their costs to the firm, both of which will be sufficient to pay the ATO in full.

The first is owed over $1.6m of which about $400K is legal costs. This has had several hearings in recent months and has progressed to where it is coming on for assessment of damages on 28 April 2011. We note that the ATO has agreed to stop action against the client for its outstanding debt until the compensation is paid, which demonstrates that this has substance and has satisfied the Department of this.

The second is [a] client who has a claim for $7.5m underway, the client has arranged ... funding for the firm which it should receive by the third week of April 2011, and it should enable them to pay $50K off their debt.

The third matter which is not a compensation payment but a payment on sale of property, for which the firm are [sic] owed $250K. The client had been held up in selling the land as he has been waiting for an environmental report. This was received last week and should generate a payment in the near future, which will be predominantly used to pay the ATO debt.

On the basis that substantial payments are forthcoming within the next few weeks and that the department is monitoring progress of the first action, they request that no further action is taken regarding the Statutory Demand. If this is acceptable the firm will not take out an application to have the Demand set aside or for an extended time for payment.

Should you require further any further information please do not hesitate to contact me, alternatively could you please advise if this proposal is acceptable.

72. The ATO never responded to the facsimile.
73. On 28 April 2011 payment of $3,024.51 was made to the ATO and credited against the debt.
74. On 31 May 2011 Mr Smith sent a further facsimile to the ATO requesting the holding of any action on the statutory demand:

Further to my fax of 30 March, I wish to update you on the progress of receiving the funds to pay this client’s Integrated Account.

The first receivable I advised in my earlier fax has been delayed as it was fees owing to the firm from a client action. The “other side” had succeeded in having the matter re-opened, however it was decided in my client’s favour. As a result the court is now “taxing” their fees relating to the case, this will have the benefit in substantially increasing the amount payable to the firm and I have been advised that this will take approximately two months to occur.

The other matters they also expected have been delayed, but the Directors are confident that they will soon be in receipt of the funds to settle their debt. They are very aware of their obligation to pay the debt and are keen to do so.

On the basis that these payments are forthcoming soon and that the department is monitoring progress of the above action, could you please retain the holding of action is [sic] regarding the Statutory Demand.

Should you require further any further information please do not hesitate to contact me.

75. On 24 June 2011 the Deputy Commissioner commenced this proceeding.
76. In the proceeding before the Registrar the Registrar referred to the facts and submissions that were made. The Deputy Commissioner conceded before the Registrar that an arrangement was entered into in September 2010 in the terms mentioned above, but it was submitted that Commercial & General Law had breached that arrangement, and that at the time the statutory demand was issued the arrangement had ceased to exist. Commercial & General Law conceded that the payment arrangement entered into in 2010 was breached, but it contended that between September 2010 and the issue of the statutory demand the ATO and Commercial & General Law entered into variations of the September 2010 agreement. Alternatively, it was put that a loose arrangement was entered into on 25 March 2011 that the Deputy Commissioner would take no further action in relation to the collection of the debt whilst it monitored the assessment of Commercial & General Law’s cases.
77. Commercial & General Law contended that the amount of the debt was compounded as a result of the conversation between Mr Smith and an officer of the ATO on 25 March 2011 and/or because of the facsimile dated 30 March 2011.
78. The Registrar, after discussing the meaning of compounding a debt, found as a matter of fact that there was not an arrangement, even a loose arrangement, as at 25 March 2011 that could be considered as compound for the debt. She found that the facsimile dated 30 March 2011, but sent on 31 March 2011, took the matter little further. She noted that the facsimile requested “no further action is taken regarding the statutory demand.” However, she found that this did not support a conclusion that an arrangement was already in place. She was also of the view that the request in the facsimile which asked the ATO to “advise if this proposal is acceptable” did not support a conclusion that there was an arrangement in place. She found that it did not support the oral evidence of Mr Smith, and she preferred the contemporaneous documentary evidence.
79. The Registrar said it would have been preferable if the ATO had replied to the facsimile but that the ATO’s failure to reply did not mean that it agreed to the request. She noted that the facsimile sent on 31 March 2011 was not noted on the ATO file until 16 April 2011, which was well outside the 21 days within which the compounding of the debt must occur under the Corporations Act.
80. Ultimately she was not satisfied that there had been any “meeting of the minds” within the relevant period.
81. She also addressed the question of reasonable satisfaction, which she noted was an objective test. She said that Commercial & General Law had been promising payment of a large debt for a long period of time. It had entered into a formal agreement to pay by monthly instalments but it had made only one payment. The communications on 25 March and 31 March 2011 gave no indication of when Commercial & General Law would be likely to pay the amount of the debt. In those circumstances it could not be said objectively that any arrangement should have been to the Deputy Commissioner’s reasonable satisfaction.
82. For those reasons, she found as a matter of fact that there had not been a compounding of the debt within the 21 day period.

The Application is Incompetent

83. The Deputy Commissioner has argued that the application is incompetent. Unsurprisingly, Commercial & General Law has argued that the application is competent. It has argued that if the finding of fact made by the Registrar cannot be reviewed by this Court then the delegation of powers to the Registrar is unconstitutional.
84. However, the question here is not whether the Court cannot ever review the exercise of judicial power by the Registrar. Rather, the question is whether the Court can review a finding of fact made in a proceeding where no power has been exercised by the Registrar.
85. The Commonwealth Parliament can legislate to allow Registrars of the Court to exercise part of the jurisdiction, powers and functions of the Federal Court. However, “the power of delegation cannot be exercised in a manner that is inconsistent with the continued existence of the ... Court as a federal court constituted under Ch III”: Harris v Caladine [1991] HCA 9; (1991) 172 CLR 84 at 94 per Mason CJ and Deane J.
86. The delegation will only be lawful and in conformity with Chapter III of the Constitution if the delegation is not “inconsistent with the obligation of a court to act judicially and that the decisions of the officers of the court in the exercise of their delegated jurisdiction, powers and functions must be subject to review or appeal by a judge or judges of the court”: Harris v Caladine at 95 per Mason CJ and Deane J.
87. In Trustees of the Franciscan Missionaries of Mary v Weir [2000] FCA 574; (2000) 98 FCR 447, the Full Court said, speaking of the delegation of the exercise of judicial power to an officer of the Court, at [20]:

[20] ...What is essential is that the control and supervision of the Court over the exercise of the delegated powers must be so real and effective that the decision, being within the Court’s jurisdiction, though made by an officer who is not a Judge, can still be seen to be a decision of the Court. ...

88. Section 35A of the Federal Court Act provides:

35A Powers of Registrars

(1) Subject to subsection (2), the following powers of the Court may, if the Court or a Judge so directs, be exercised by a Registrar:

(a) the power to dispense with the service of any process of the Court;

(b) the power to make orders in relation to substituted service;

(c) the power to make orders in relation to discovery, inspection and production of documents in the possession, power or custody of a party to proceedings in the Court or of any other person;

(d) the power to make orders in relation to interrogatories;

(e) the power, in proceedings in the Court, to make an order adjourning the hearing of the proceedings;

(f) the power to make an order as to costs;

(g) the power to make an order exempting a party to proceedings in the Court from compliance with a provision of the Rules of Court;

(h) a power of the Court prescribed by Rules of Court.

(2) A Registrar shall not exercise the powers referred to in paragraph (1)(f) except in relation to costs of or in connection with an application heard by a Registrar.

(3) The provisions of this Act and the Rules of Court that relate to the exercise by the Court of a power that is, by virtue of subsection (1), exercisable by a Registrar apply in relation to an exercise of the power by a Registrar under this section as if references in those provisions to the Court were references to the Registrar.

(4) Notwithstanding any other provision of this Act and any provision of the Public Service Act 1999 or of any other law, a Registrar is not subject to the direction or control of any person or body in relation to the manner in which he or she exercises powers pursuant to subsection (1).

(5) A party to proceedings in which a Registrar has exercised any of the powers of the Court under subsection (1) may, within the time prescribed by the Rules of Court, or within any further time allowed in accordance with the Rules of Court, apply to the Court to review that exercise of power.

(6) The Court may, on application under subsection (5) or of its own motion, review an exercise of power by a Registrar pursuant to this section and may make such order or orders as it thinks fit with respect to the matter with respect to which the power was exercised.

(7) Where an application for the exercise of a power referred to in subsection (1) is being heard by a Registrar and:

(a) the Registrar considers that it is not appropriate for the application to be determined by a Registrar acting under this section; or

(b) an application is made to the Registrar to arrange for the first-mentioned application to be determined by the Court;

he or she shall not hear, or continue to hear, the application and shall make appropriate arrangements for the application to be heard by the Court.

(8) In this section, Registrar means the Registrar, a Deputy Registrar, a District Registrar or a Deputy District Registrar of the Court.

89. Section 35A(1) identifies the powers delegated to the Registrar, including powers prescribed by Rules of Court: s 35A(1)(h). Section 35A(7) allows for a party to a proceeding to insist upon the application which is to be heard by the Registrar be heard by the Court by obliging the Registrar to cease to hear, or continue to hear, the application and to make arrangements for the application to be heard by the Court: s 35A(7). In other words, s 35A(7) allows a party to request the Court to hear an application at any time, even after the Registrar has commenced the hearing.
90. I offered to hear the application for winding up in lieu of the Registrar but that offer was declined by Commercial & General Law. Mr McNamara said that no application would be made to the Registrar to have the Registrar cease to hear, or continue to hear, the application for winding up in the event that this matter was returned to the Registrar. Therefore, I proceed on the basis that Commercial & General Law is content to have the Registrar continue to hear the application for winding up if I find that this application is incompetent or, alternatively, if competent, that it should be dismissed.
91. Section 35A(5) addresses the Constitutional imperative in Chapter III by allowing a party to apply to the Court for a review of the exercise of a power of the Court by a Registrar under subsection (1). Subsection (6) allows the Court to carry out that review of its own motion and make such order or orders as the Court thinks fit with respect to the proceeding in which the power has been exercised by the Registrar.
92. Section 35A(1) empowers the Registrar to exercise the powers identified in the paragraphs of the subsection. Importantly, it authorises the Registrar to exercise the powers to make orders although, for some reason, paragraph (a) only talks about the power to dispense with service of any process of the Court. However, that power could only be exercised by the Registrar making an order to that effect.
93. In all other respects subsection (1) identifies the powers that may be exercised by the Registrar.
94. As I have said, s 35A(1) allows for Rules of Court to prescribe the power of the Court which may be exercised by the Registrar. It is important to note that paragraph (h) talks of Rules of Court, not “the Rules of Court”. The Federal Court Rules 2011 have prescribed a wide-range of powers that may be exercised by the Registrar, but those powers are not relevant in this proceeding. Instead the relevant authority is given to the Registrar by the Corporations Rules, which provide in r 16.1:

16.1 Powers of Registrars

(1) For the purposes of paragraph 35A(1)(h) of the Federal Court of Australia Act 1976, if the Court or a Judge so directs, a Registrar may exercise a power of the Court:

(a) under a provision of the Corporations Act mentioned in column 2, or a provision of these Rules mentioned in column 3, of an item in Part 1 of Schedule 2; or

(b) under a provision of the ASIC Act mentioned in column 2, or a provision of these Rules mentioned in column 3, of an item in Part 2 of Schedule 2.

(2) A decision, direction or act of a Registrar made, given or done under these Rules, may be reviewed by the Court or a Judge.

(3) An application for the review of a decision, direction or act of a Registrar made, given or done under these Rules, must be made within:

(a) 21 days after the decision, direction or act complained of; or

(b) any further time allowed by the Court.

95. Schedule 2 of the Corporations Rules identifies the provision of the Corporations Act and the rule of the Federal Court Rules, and then identifies (for information only) the power which is given to the Registrar.
96. Item 48 provides for the power given to the Court in s 459P of the Corporations Act. Rule 16.1 of the Corporations Rules and Schedule 2 to those Rules are consistent with s 35A(1) of the Federal Court Act in that what is given to the Registrar is the power to make an order. In the case of s 459P the Registrar is given the power to wind up a company in insolvency.
97. Rule 16.1(2) provides that a “decision, direction or act of a Registrar made, given or done under these Rules, may be reviewed by the Court or a Judge”. Rule 16.1(2) is superfluous because that power is given to the Court in s 35A(6). Section 35A does not empower the Court to make rules providing for a review process not otherwise contemplated in s 35A itself. There are no other powers given to the Court in the Federal Court Act to provide for wider review powers to the Court than those powers contemplated in s 35A.
98. Section 35A(5) does not contemplate that a party may, from time to time, seek to have the Court review individual findings of fact made by a Registrar before the Registrar exercises the power given to the Registrar in s 35A(1) or pursuant to the rules under s 35A(1)(h).
99. The power which is given to the Court in s 35A(5) and (6) is to review the exercise of the power, which means the order made by the Registrar under that power. If it were otherwise a party could, without asking the Registrar to cease hearing the application, ask the Court to review every individual finding of fact as and when the Registrar made those findings of fact.
100. It is for those reasons that in my opinion the application is premature. No right of review is available to a party in relation to a finding of fact made by a Registrar except insofar as a party might apply under s 35A(7) to have the matter referred to a court for further consideration. If a party is content for the matter to proceed before the Registrar, then the party’s right to review arises when the Registrar has exercised the power that the Registrar has been given either under s 35A itself or under Rules of Court pursuant to s 35A(1)(h). The Registrar exercises the power when the Registrar makes the relevant order. As soon as that order is made the party who seeks the review is entitled to apply to the Court for that review.
101. It follows then that in my view the application is incompetent because the Registrar has not yet exercised any power.
102. However, in case I am wrong about that I will address the application on its merits because I think, as did the Registrar, that Commercial & General Law’s evidence falls far short of that necessary to prove that it compounded for the debt owed to the Deputy Commissioner.

Merits of the Application

103. In Commonwealth Bank of Australia v Parform Pty Ltd [1995] FCA 1445; (1995) 13 ACLC 1309, Sundberg J said at 1311:

To “compound” for a debt is to accept an arrangement for payment of the amount of the debt or of a different amount.

104. The word “arrangement” has different meanings in different contexts. However, in The Commissioner of Taxation of the Commonwealth of Australia v Lutovi Investments Pty Ltd [1978] HCA 55; (1978) 140 CLR 434, Aickin J said at 463 that where the arrangement has to be “entered into”, “... it is hard to see how it can be distinguished from an agreement ...”.
105. In the same case Gibbs and Mason JJ noted that an arrangement can be implied or inferred from the conduct of the parties. They went on to state at 444 that:

It is, however, necessary that an arrangement should be consensual, and that there should be some adoption of it. But in our view it is not essential that the parties committed to it or are bound to support it. An arrangement may be informal as well as unenforceable and the parties may be free to withdraw from it or to act inconsistently with it, notwithstanding their adoption of it.

106. The parties reached at least an arrangement and possibly an agreement in September 2010 that Commercial & General Law could pay the debt owing at the rate of $6,000 per month together with the two larger payments to which I have referred. Only one payment was made and therefore at some time after Commercial & General Law had defaulted that agreement or arrangement ceased to exist. There was no agreement or arrangement in place at the time the Deputy Commissioner issued the statutory demand on 8 March 2011.
107. No agreement was ever entered into after that time, but that does not by itself resolve the question because it may have been that an arrangement or understanding was reached between the parties that Commercial & General Law was entitled to time within which to pay the debt and therefore had compounded for its debts.
108. The telephone conversation of 25 March does not demonstrate that any agreement, arrangement or understanding was reached at that time. Indeed, Commercial & General Law was told that the ATO could not grant an extension, which clearly indicates that there was no agreement or arrangement or understanding at that time that Commercial & General Law had any time within which to pay the debt. The debt remained immediately payable.
109. Commercial & General Law was told that it could send a written proposal on how Commercial & General Law would address the debt. That was the only invitation given to Commercial & General; that is, to submit a written proposal. There was no indication in that invitation that the ATO would accept, or indeed be bound to accept, any proposal which was made.
110. Mr Smith was asked in his oral evidence to address the ATO file note in respect of the telephone conversation of 25 March. He said:

Is that a telephone conversation you [had]?---Yes, that sounds like the one that triggered me to send them the fax we talked about earlier.

Does that set out in full the detail of the conversation you had?---Again, my recollection is that we had an agreement that they would take no further action, and that’s not on here.

...

And is that changed from anything that – or any way that they had treated previous agreements that you had reached with them? Was anything different about---?---No.

And what was your expectation as a result of sending them the information that you sent them?---My expectation is that they would take no further action, and that, when the money came in, we would send it to them.

Was your expectation that you had to keep in touch with them at all?---Effectively, yes. When it delayed again, I sent them the next fax in May. Because it had still taken a bit longer and I thought it was a smart thing to do, to keep them in the loop. That was really the basis of the agreement we had, that I would keep them informed, and they would keep a watching brief on it.

111. The proposal put on 31 March was sent by facsimile at about 3.00pm, probably Brisbane time, which meant that the ATO only had in the order of two and a half hours available to it to consider the request if it was to reply within the period. The ATO did not reply within the period and as I have mentioned it did not mark up its file that it had received the facsimile until 16 April.
112. Mr McNamara contended that because the ATO did not respond within the two and a half hour window of opportunity it must be inferred that it had agreed to the proposal.
113. In my opinion, that is an inference which cannot be drawn.
114. Examination of the facsimile of 31 March reveals that it did not assume that the proposal would be accepted. The final two paragraphs show that Mr Smith must have understood that he required the ATO’s consent to his proposal. The last paragraph enquires unequivocally as to whether the ATO was prepared to consent.
115. Mr Smith gave evidence that he thought that after the conversation of 25 March “we had an agreement that they would take no further action”. In the face of the note of the ATO it is very difficult to understand how he could have thought that, but I will assume that was his state of mind at the time. He also said that his expectation was that the ATO would take no further action. Again, having regard to the file note, it is difficult to understand how that could be his expectation, but again I will assume that.
116. However, Mr Smith’s understanding and expectation are simply not relevant to a determination of whether there was an agreement, arrangement or understanding reached on 25 March or 31 March. Whether there was such an agreement, arrangement or understanding must depend upon the objective facts, and the objective facts in this case do not support Mr Smith’s understanding or expectation.
117. The facsimile of 31 March does not support Mr Smith’s understanding or expectation because he wrote asking if the proposal was acceptable. The facsimile clearly establishes that the ATO had not agreed and had not reached an arrangement or understanding to allow Commercial & General Law time to pay.
118. Moreover, the facsimile of 31 May also assumed that no agreement, arrangement or understanding of the kind Mr Smith understood or expected had been reached. If his understanding or expectation was as he said it was, and as I said I will assume that was his state of mind, then he must have been wrong about his understanding or expectation because otherwise he would not have needed to have sent the facsimile of 31 May in the terms that he did.
119. If the agreement, arrangement or understanding had already been reached on 25 March as he said, or 31 March as was argued, then there was no need to ask the ATO to withhold action regarding the statutory demand. The statutory demand could not be relied upon for an application under s 459P if there had been a previous agreement, arrangement or understanding of the kind to which he deposed.
120. I agree with the Registrar that there was no agreement, arrangement or understanding reached at any time after the issue of the statutory demand under which Commercial & General Law was entitled to pay the debt owed to the ATO at some later time or by instalments.
121. The Registrar also found that even if there was an arrangement or understanding of that kind it was not to the reasonable satisfaction of the ATO.
122. It is difficult to address this question in a vacuum. This question only needs to be addressed if first it is concluded that there is an agreement, arrangement or understanding. If the parties at any given time have reached an agreement, arrangement or understanding, then one would assume that it was at least to their subjective satisfaction because otherwise the agreement, arrangement or understanding would not have been reached.
123. However, as Sundberg J said in Commonwealth Bank of Australia v Parform Pty Ltd at 1311:

The words “to the creditor’s reasonable satisfaction” seem to me to posit an objective test. In other words, where the debtor puts up a proposal which the creditor rejects, it is for the court to decide whether in rejecting it the creditor was acting reasonably in all the circumstances. If the test were wholly subjective, the legislature would have employed the phrase “to the creditor’s satisfaction”.

124. If there was a proposal made to the ATO that it is said should have been satisfactory to the ATO, I would reject that contention.
125. Treating the test as objective, the history of the matter shows a number of proposals being put to the ATO, none of which were ever met. Indeed at one stage the parties were in agreement that Commercial & General Law could pay off the debt at the rate of $6,000 per month. Only one payment was ever made. No explanation was ever given for the failure to make the other payments in accordance with that agreement.
126. Commercial & General Law continued over a period of time to claim that it would be in a position to pay the whole of the debt when a particular event occurred, but either the event never occurred or Commercial & General Law never paid the amount.
127. In my opinion, looked at objectively, the proposals put to the Deputy Commissioner could not have been to the Deputy Commissioner’s reasonable satisfaction.
128. For those reasons, I agree with the Registrar’s conclusion.

Conclusion

129. In my opinion this application is incompetent and the Registrar should continue to hear the application for winding up, which has been listed before her on 8 November 2011.
130. As I have said, if I am wrong about the conclusion that the application is incompetent, in my opinion the Registrar’s conclusions of fact were entirely correct and for that reason as well she should continue to hear the application for winding up on 8 November 2011.
131. Accordingly, there will be an order that the application be dismissed as incompetent. There will be a further order that Commercial & General Law pay the Deputy Commissioner’s costs of the application for review.
     

I certify that the preceding one hundred and thirty-one (131) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lander.

Associate:

Dated: 7 November 2011